Income-share agreements (ISAs) are a way for students to finance higher education that reduces the risk that their repayment amounts will be burdensome relative to their earnings. Private investors or educational institutions themselves front the costs of education, and in exchange, they receive a percentage of the student’s earnings for a prespecified period. If the educational program does not lead to high earnings, the downside risk is shared with the investors or institutions. Traditional student loans put most of the risk on borrowers. ISAs are a relatively new innovation, however, and regulatory changes are required to facilitate their expansion.

Traditional financial regulations such as usury laws regulating interest rates do not work for ISAs, simply because they have no interest rates. New rules are necessary to protect consumers, define the proper scope of regulators’ power, and give potential investors the legal certainty they need to make significant investments in ISAs. Regulations should mandate thorough disclosures of ISA terms so students know what they are agreeing to. But regulations should also create a “safe harbor” provision that restricts regulators’ ability to bring enforcement actions against ISA providers that offer reasonable terms. A new legal framework should also clarify the treatment of ISAs in bankruptcy and assign oversight authority to a single federal regulator.